(image copyright The Open University 2010) I've been enjoying a little look around the "iTunes U" online university and found some podcasts from The Open University and in particular thought this one had some relevance: Money and Emotions
They are looking at how emotions affect financial decisions and as well as discussion from the people carrying out the research they interview a few city traders including a Forex trader. It's interesting to hear from the Forex trader that he feels a lot more comfortable with his positions when they're going the right way rather than against him. It doesn't sound much different to someone sitting in hope watching their Betfair trades!
As is all too often the case when it comes to successful trading, the piece doesn't offer any solutions, but there are some surprising points. For example, one observation they made from their analysis is that contrary to popular belief, people largely devoid of emotion but with all their logical reasoning in tact were not better at making financial decisions. Furthermore, one of the traders' managers at a bank felt that outbursts of emotion such as banging the desk / throwing the phone etc was helpful! Her reasoning was that she felt they need to let off steam and can subsequently make better decisions if they've got it out of their system.
Personally, when I've "had a moment" I have frequently gone on to have a winning day, but very often at the (potential) cost of taking far greater risk. So, yes, sometimes I've just made things worse. What I have noticed though is that I've made several of my most profitable trades in this mindset. Trading is inherently risky but, particularly when I'm happy with the way things are going, I naturally start becoming more cautious - and hence limit my potential profitability. I guess the ideal balance is to remove the fear of taking a reasonable amount of risk whilst not needing to get steamed-up to do so!
Has anyone found any other research into this topic which may be useful?
The top traders, and the few successful gamblers out there, are more than happy with a 2% profit on turnover! I always keep that in mind when i'm reviewing my accounts. I know it's slightly off your topic but it's always worth keeping in mind. Excellent blog by the way.
ReplyDeleteJimmy
Hi Jimmy, All constructive comments are welcome whether on or off topic! I only very recently added the profit on turnover figures to my spreadsheet. It wasn't so much the overall total that interested me, but the months where I'd managed very high %ages. I then reviewed my daily notes for some of these months to see what I was doing right, which was interesting.
ReplyDeleteOne of the things was simply stopping when I'm ahead on really good days. I have a tendancy to get sloppy and too relaxed when I'm doing a lot better than average, so now I just think, "that's great, I'll stop now", rather than, "I've got loads, lets make more!". I know the really top traders out there will think this is nuts, but I'm finding it works for me. It keeps things fresh too.
Cheers.
I always like the way your post have some good advice in them, can we sway links I am following you mine is - http://newsportsexchangetrader.blogspot.com/
ReplyDeleteThanks
Steve
Thanks Steve. I look forward to reading more posts. Link added.
ReplyDeleteGlad you like the podcast. You can find more on our research at www.xdelia.org. We are currently working on generating more practical outcomes and advice from the research, but one approach that seems to help many experienced traders is explicitly writing down strategies and always writing down reasons for changing strategies. It helps innoculate against the impact of strong emotions on sticking to strategies.
ReplyDeleteProf. Mark Fenton-O'Creevy
Hi Mark, many thanks for stopping by and leaving a comment.
ReplyDeleteThat is a great piece of advice about writing strategies down and you're - a) the first professor to leave a comment on my blog that I know of and b) your advice is in the unique position of being bourne out of academic research and not the school of hard knocks!
I will take this up properly. Until now I've usually made a note of what my strategies are in my results spreadsheet, but I've not been methodical about it and I think having them printed out on my desk when I'm trading would be better too so as to have them fresh in my mind.
I'll keep an eye out on your website for further practical advice in future. That sounds very useful indeed.
Regards, MG